Wayfair Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; unaudited. Wayfair operates an e-commerce home-goods business across five brands, with over seven million products from more than 7,000 suppliers. It reports one operating and reportable segment.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $786.9 | $491.8 | $1,534.3 | $916.1 |
| Gross profit / margin | $188.5 / 24.0% | $120.8 / 24.6% | $367.6 / 24.0% | $223.6 / 24.4% |
| Operating loss | $(48.7) | $(19.5) | $(90.8) | $(46.7) |
| Net loss | $(48.3) | $(19.3) | $(89.5) | $(46.5) |
| Net loss per share, diluted | $(0.57) | $(0.23) | $(1.06) | $(0.56) |
| Adjusted EBITDA | $(24.9) | $(5.0) | $(45.8) | $(17.3) |
| Cash from operations | $24.9 | $28.5 | $(26.3) | $(6.7) |
| Free cash flow | $(19.4) | $11.0 | $(100.0) | $(40.4) |
Liquidity, debt and investment
- At June 30, cash and cash equivalents were $220.3 million; short-term investments were $82.7 million and long-term investments $50.5 million. Cash and cash equivalents declined $113.9 million from year-end 2015.
- Working capital was negative $2.5 million, compared with positive $95.3 million at December 31, 2015. Current liabilities were $425.1 million and current assets $422.7 million.
- No borrowings were outstanding under the credit agreement. The facility provided a $20 million revolving line (up to $5 million for direct borrowings) and a separate $45 million credit-card program; the agreement was renewed July 31, 2016.
- A $29.9 million lease financing obligation was recorded for a completed warehouse build-to-suit arrangement. First-half purchases of property and equipment were $61.4 million, with $12.3 million of site and software development costs.
Changes versus prior comparable periods
- Q2 revenue grew 60.0%; first-half revenue grew 67.5%. Direct Retail revenue rose 71.6% in Q2 and 81.2% in the first half, while “Other” revenue fell 39.2% and 37.3%, respectively, primarily due to lower retail-partner sales.
- Direct Retail growth reflected more active customers (+65.0%) and higher trailing-twelve-month revenue per active customer (+13.2%). Q2 orders delivered increased 49.6%, and average order value rose 14.7%.
- Gross margin declined to 24.0% in both periods, from 24.6% in Q2 2015 and 24.4% in the first half of 2015, which management attributed to product mix. Operating expenses rose 69.1% in Q2 and 69.6% in the first half; operating losses and net losses widened.
- Advertising expense increased in dollars but declined as a percentage of revenue: 12.0% versus 12.5% in Q2 and 12.5% versus 13.1% in the first half. Management cited repeat-customer leverage, partly offset by investment in Europe and Canada.
Outlook, commentary and risks
- Management expects operating expenses to continue increasing with advertising, hiring, technology, merchandising and operations investments. It anticipates near-term losses while investing for potential longer-term returns, with no assurance those investments will generate the expected returns.
- Management estimated 2016 capital expenditures at approximately 4.0% of revenue, for technology infrastructure and supply-chain expansion. This is an expectation, not formal earnings guidance.
- Management believed cash, investments and operating cash generation would cover anticipated needs for the foreseeable future, but cautioned that liquidity assumptions could prove incorrect and additional financing might not be available on acceptable terms.
- States had assessed approximately $28.1 million of alleged sales and similar taxes, excluding later periods, interest and penalties. Wayfair disputed the obligation, intended to defend its position, and recorded no liability because it considered a loss not probable; outcome remains uncertain.
- New leases entered into after December 31, 2015 carried aggregate future minimum rental commitments of $359.1 million. The company also disclosed $10.4 million of letters of credit securing leases.
- Two class actions were resolved during the period: the securities complaint was dismissed with prejudice; a consumer pricing complaint was voluntarily withdrawn without prejudice. The company said it knew of no other claims expected to have a material adverse effect.
- Other risks include execution of customer-acquisition and retention investments, operating losses and cash use, working-capital volatility, international expansion and foreign-currency exposure. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether rapid Direct Retail growth can be sustained and “Other” revenue declines remain contained.
- Whether gross-margin pressure and expanding operating losses improve as customer and order volumes grow.
- How capital expenditures, lease commitments and working-capital needs affect cash balances and free cash flow.
- Developments in the $28.1 million sales-tax assessments and any subsequent legal or regulatory matters.
- Actual 2016 capital spending versus management’s approximately 4.0%-of-revenue expectation and the returns on growth investments.